ACCTG 226/411

ASSIGNMENT

1. At the beginning of the current year, Rapp Company leased a new materials to Lake Company
for 5 years. The annual rental is P900,000. Additionally, Lake paid P500,000 to Rapp as a lease
bonus and P250,000 as a security deposit to be refunded upon expiration of the lease. What
amount of rental revenue should be reported for the current year?

2. At the beginning of the current year, Wren Company leased a building to Brill under an
operating lease for ten years at P500,000 per year, payable the first day of each lease year. Wren
Company paid P150, 000 to a real estate broker as a finder fee. The building depreciated P120,
000 per year. Wren Company incurred insurance and property tax expense totaling P90, 000 for
the current year. What amount should be reported as net rent income for the current year?

3. At the beginning of the current year, Jade Company purchased a new machine for P4,800,000
and leased it to East the same day. The machine has an estimated 12-year life and will be
depreciated P400,000 per year. The lease is for a three-year period at an annual rental of
P850,000.

Additionally, East Company paid P300,000 to Jade as a lease bonus to obtain the three-year
lease. Jade Company incurred insurance expense of P80,000 for the leased machine during the
current year. What amount should be reported as pretax income on the leased asset for the
current year?

4. At the beginning of the current year, Myriad Company purchased a tractor at a cost of
P1,600,000 for the purpose of leasing it. The tractor is estimated to have a useful life of 5 years
with residual value of P100,000. Depreciation is on a straight line basis. On April 1, Myriad
Company entered into a lease contract for the lease of the tractor for a term of two years. The
lease fee is P50,000 monthly and the lessee paid P600,000, the lease fee for one year.

Myriad Company paid P120,000 commission associated with negotiating the lease, P15,000 minor
repairs and P10,000 transportation of the tractor to the lessee during the current year. What
amount of net rent revenue should be reported for the current year?

Questions 5 and 6. At the beginning of the current year, Glen Company leased a building to Dix
Company for ten-year term at an annual rental of P500, 000. At inception of the lease, Glen
received P2, 000,000 covering the first two years’ rent of P1,000,000 and a security deposit of
P1,000,000. This deposit will not be returned to Dix upon expiration of the lease but will be applied
o payment of rent for the last two years of the lease.

5. What portion of the P2, 000,000 should be reported as current liability at current year-end?
6. What portion of the P2, 000,000 should be reported as noncurrent liability at current year-
end?

Questions 7 and 9
Camia Company is in the business of leasing new sophisticated equipment. As lessor, the entity
expects a 12% return. At the of the lease term, the equipment will revert to Camia Company. At
the beginning of current year, an equipment is leased to another entity under a direct financing
lease.

Cost of equipment to Camia 5,000,000

Residual value – unguaranteed 600,000
Annual rental payable in advance every January 1 900,000
Initial direct cost incurred by lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%

7. What is the gross investment in the lease?

8. What amount should be reported as total unearned interest income?

9. What amount should be reported as interest income for current year?

Questions 10 and 12

On December 31, 2022, Benz Company, a lessor, sold a machinery that it had been leasing under
a direct financing lease. On December 31, 2021, the following account balances were associated
with the lease:

Gross lease receivable

Unearned interest income
Carrying amount of lease receivable

The interest rate implicit in the lease is 10%. On December 31, 2022, Benz Company sold the
leased machinery to the lessee for P3,250,000 cash.

10. What amount of interest income should be recognized for 2022?

11. What is the carrying amount od lease receivable on December 31, 2022?

12. What amount should be recognized as loss on sale of machinery on December 31, 2022?

Questions 13 and 16
At the beginning of current year, Panorama Company leased a building from a lessor with the
following pertinent information.

Annual rental payable at the end of each year 1,000,000

Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62
 13. What amount should be recognized initially as cost of the right of use asset?

14. What amount should be recognized as depreciation of right of use asset for current year?

15. What amount should be recognized as interest expense for current year?

16. What amount should be reported as lease liability at year-end?

Questions 17 to 19 Vanderbilt Company is a dealer in machinery. At the beginning of current

year, a machinery was leased to another entity with the following provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

20. At the end of the 5-year lease term, the machinery will revert to Vanderbilt. Vanderbilt incurred
initial direct cost of P300,000 in finalizing the lease agreement.

17. What amount should be reported as total unearned interest income?

18. What amount should be reported as interest income for current year?
19. What amount should be reported as interest income for current year?
At the beginning of current year, Howe Company leased equipment to Kew Company for an eight-
year period. Equal payments under the lease are P500,000 and are due at beginning of each year.
The first payment was made at the beginning of current year. The selling price of the equipment is
P2,900,000 and the carrying amount is P2,000,000.

The lease is appropriately accounted for as a sales type lease. The present value of the lease
payment at an implicit interest rate of 12% is P2,780,000. What amount of gross income on sale
should be reported for the current year?